We all know it’s best not to have any debt at all. Unfortunately, the reality is that most of us—at least for a portion of our lives—will carry some debt. Paying debts off inefficiently can cost you more money, damage your credit, and take you longer than it has to.
If you’re ready to start tackling your debt, you’ll want to know the best way to do this. Have you been wondering where to start, or if it matters whether you tackle the big debt or small debt first?
If you think making payments is all it’s going to take, think again. This article will give you the information you need, and help you on your way toward being debt-free.
In This Article
You Have Options
Many people fall into the trap of putting money toward their credit cards proportionally. They do this by looking at the amount of money they owe on each credit card. Then they’ll put the greatest amount of money toward the credit card that has the largest balance on it.
Yes, it is possible that this approach can have you free of debt—eventually. However, this doesn’t necessarily mean it’s the best way to approach your debt. You will have to look beyond just the amount of money you owe.
Essentially, there are two main ways to approach your debt. The first is a classic approach that involves taking interest rates into consideration. This is an incredibly effective way to attack accrued debt.
Another popular option looks at debt in a different way. Instead of approaching based on interest rates, you’ll work toward paying off smaller debts first. This is known as the snowball method.
Let’s take a close look at both of these approaches.
The Avalanche Method
Paying off debt proportionally doesn’t account for the amount of interest each credit card has. In some cases, you’d be better off putting greater amounts of money toward lower balances. This is the case when those balances are attached to cards that have high-interest rates.
The avalanche approach to debt eradication hinges on the amount of interest you pay each month. If you haven’t looked at the interest associated with your credit cards, it’s worth paying attention to.
This is especially important if you picked up a card that offered special terms for the first year. It’s likely that in the years since then, the interest rate has gone up quite a bit. You may not even realize how much money you’re losing to interest.
To use this method of debt management, you’ll begin by creating a spreadsheet. On this spreadsheet, plan to track the amount of debt you owe, your minimum payment, and the rate of interest.
Should you find it easier to use debt calculators specifically for this purpose, you could find them very useful.
Once you have the information in front of you, plan on paying off those accounts with high-interest rates. The amount of the balance on each credit card won’t matter. With this method, it all comes down to avoiding those interest-related fees.
Set up a budget for yourself, and be sure to put the minimum to all of your cards. This will go a long way toward helping you work off that toxic debt.
This approach to paying off your debt will prevent you from losing even more money on unnecessary interest payments. It will also have you eliminating debt more quickly.
The Snowball Method
This approach to debt management can be especially beneficial for those who need to see their progress. Have you tried other ways to get your debt under control and become discouraged? Do you feel like you’re only treading water?
If that’s been your experience, the snowball method might be a good option for you.
With this approach, you look to your smallest debts first. You don’t take the interest into consideration at all. Simply look at what you owe. Whether the smallest debt is 30 dollars or 3,000 dollars, plan to pay that off first.
Once again, plan to put the minimum amount toward all your credit cards. Except, however, for the one with the smallest balance. When it’s time to pay that bill, put as much money as you can toward it. This enables you to pay that bill off more quickly and close out that account.
It may seem counterintuitive to reach for those small balances first, but this method is actually highly recommended.
After you’ve paid off that first small debt entirely, continue to move through your other debts. Continue applying minimum payments to the other cards, and more to the one with the lowest balance. Keep moving your way up the ladder until you’re facing fewer debts.
This approach doesn’t take into account the extra amounts you might be hit with from interest. It does, though, provide the satisfaction of achievement. It can also help improve your credit score by closing out those pesky small balances you owe.
Choose a Method—And Stick With It
Either of these methods can help get you to the debt-free status you long to have. There are arguments for and against each one. The truth is, you will not find a single method that is best for everyone. What matters most is that you choose one and stick to it.
To do this effectively, take a good look at the way you handle your finances. Be honest about your abilities and where you’re willing to spend time and effort.
Are you worried that you won’t be able to maintain a spreadsheet? Do you think you’ll be discouraged using the avalanche approach? Simply opt for the snowball method instead.
Saving money on interest won’t do you any favors if you’re overwhelmed by your debt and continue using credit cards. If making monthly payments and sinking leftover funds into the smallest balance works for you, go ahead and embrace it.
More important than whether you tackle your biggest or smallest debt first is that you commit to doing it. Create a plan, stay with it, and in a short period of time, you’ll be seeing progress.
Are you ready to begin tackling debt? Here are a few things you can do to help set yourself up for success.
Preparing to Pay Off Debt
You don’t want to approach your debt haphazardly. This will only result in throwing money at your debt and wishing it would go away. Take the time to create a plan of action and approach your debt methodically.
To do this, you’ll want to take the following steps.
- Create a budget. I can’t emphasize enough the importance of budgeting for successful debt eradication. Understanding what you have, what you owe and where you are currently spending money, is crucial to success.
- Stop using your credit cards. If you’re trying to pay off debt while still creating more debt, you’re only treading water. Craft your budget so you’re only spending what you have.
- Add a buffer—it’s a fact of life that you can’t plan for everything. If an emergency comes up, you’ll have a little wiggle room. When it doesn’t, go ahead and sink that money into your balances at the end of the month.
This is one of those times where you can’t over-prepare. Preparing is what’s going to set you up for success. Use it to your advantage.
Dealing With Debt
Debt isn’t always avoidable. But once you have it, you’ll need to pay it off. Don’t let fear leave you feeling like you’ll never be caught up again—you really can be.
There’s no one right (or wrong) method to paying off your debt. That is, as long as you use a legitimate approach, like the ones I’ve shared. Understand your options and how you spend money, then choose the method that best suits you.
Whether you pay off small debts first or look to where you’re being hit with interest, becoming debt-free is possible. With some dedication and commitment, you too can join those who no longer have debt hanging over them.
John Blakely has had a passion for all things personal finance for over a decade. He is a firm believer in having big financial dreams and executing on a plan to realize them. He is an Education Ambassador for ScoreSense, where you can find more of his writings.